Discussion Paper Details

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Title: Risky Bank Guarantees

Author(s): Taneli Makinen, Lucio Sarno and Gabriele Zinna

Publication Date: May 2019

Keyword(s): banks, government guarantee, Risk premium and sovereign risk

Programme Area(s): Financial Economics and International Macroeconomics and Finance

Abstract: Applying standard portfolio-sort techniques to bank asset returns for 15 countries from 2004 to 2018, we uncover a risk premium associated with implicit government guarantees. This risk premium is intimately tied to sovereign risk, suggesting that guaranteed banks, defined as those of particular importance to the national economy, inherit the risk of the guarantor. Indeed, this premium does not exist in safe-haven countries. We rationalize these findings with a model in which implicit government guarantees are risky in the sense that they provide protection that depends on the aggregate state of the economy.

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Bibliographic Reference

Makinen, T, Sarno, L and Zinna, G. 2019. 'Risky Bank Guarantees'. London, Centre for Economic Policy Research.